RHI Magnesita: Brick by brick consolidation

By Davide Ghilotti
Published: Thursday, 14 December 2017

The merger between RHI and Magnesita ‘makes sense’ because the refractory industry tends toward consolidation, while raw material shortages in China may lead supply to diversify elsewhere, according to the new company’s chief executive officer, Stefan Borgas.

As he oversaw the final steps of the merger between two of the largest participants in the global refractories industry, Stefan Borgas, chief executive officer of RHI Magnesita, was adamant that this was just the beginning.

"The industry should have strong players. We support the creation of bigger entities, rather than a lot of small guys," he told Industrial Minerals during a recent meeting in London, prior to the official listing of the new company on the London Stock Exchange.

Headquartered in Austria, RHI AG and its Latin American counterpart, Brazil’s Magnesita, completed their merger at the end of October, following a year-long process that required clearing from both European and Brazilian authorities.

The new venture brings a pool of more than 50 facilities together globally, with a strong presence in the Americas, Europe and Asia, as well as direct access to its own raw materials such as magnesia and dolomite. 

The prospect of competing against this group has prompted worries from other participants in the refractories industry, who shared their fears of struggling to keep up with such a competitor at the recent conferences in Santiago, Chile, and Aachen, Germany.

And yet, the industry should and will consolidate further, according to Borgas. "RHI Magnesita will have about 12% of global market share, [once joined]," he said. "That is not a lot. There is still room for consolidation."

In his view, the refractories sector as a whole – an industry worth some $20 billion – is not very large and is still dispersed in many ways. He used China, a crucial producer and consumer of refractories, as an example of an industry he described as "extremely unconsolidated."

Feat_RHL_1  

Raw materials: cycles and strategies

The industry is now facing the dire situation of low availability of raw materials and high prices for what product is available, which remains a cyclical issue for the sector, rather than a structural one, the executive claimed.

"If you have a large company, you cannot adhere to the cycles [of low and high raw materials supply and prices]," he told Industrial Minerals.

At the same time, he did concede that the vertically-integrated nature of both merging companies was central to the decision to bring them together.

RHI, of which Borgas was CEO until the merger, and Magnesita share "the same background" in that both are companies that were structured around the direct control of raw materials.

"This is why the merger makes sense," he said.

And yet, what is happening now in the raw materials market is indeed driving some significant business decisions for the companies.

In August last year, RHI mothballed fused magnesia (FM) production at its facility in Porsgrunn, Norway, due to weak market conditions (the site continued to produce caustic calcined magnesia). A year later, the company has decided to restart the FM production lines. The first volumes are expected in December, prior to a ramp up in early 2018.

RHI must have taken the view that running the Norwegian FM line will now be economical in the long term, in order to justify the investment to re-establish production at the site, market participants have said to Industrial Minerals.  

While Borgas did not directly comment on magnesia pricing trends, he did tell Industrial Minerals that the outlook for raw materials has indeed changed – possibly, for ever.

"The days of dirty, cheap raw materials from China are finished," he said. "[The Chinese] are putting an end to that [by controlling pollution and industrial practices]."

This view was echoed by others in the industry.

"The market had been artificially low for a number of years, due to the low price/high volume export strategy of China," a refractories producer attending the October conference in Aachen said.

"We are seeing the end of it, though. Some prices going around now may be too high, but they have been too low for years. There will have to be a readjustment."

This adjustment may come in the form of reduced overall output from China toward the international market in the future, leading to prices firming on higher levels compared with previous years.

In turn, this may create new appetite for raw material originating from outside of China that could help compensate the lower output from the largest producer.

"If China cuts off output further, production will shift elsewhere," said Borgas, who added that, after a transition period of two or three years of volatility, supply would eventually find a new normal between China and rest of the world.

"The consolidation of mines in China is the first step toward that," he said.

While the main discourse around the refractories sector is in raw materials, the executive stressed that the focus of RHI Magnesita is in finished products. "Our raw materials business is mainly directed to internal use – we sell very little," he said.

This applies to the current situation of market tightness and high prices. Borgas made clear that he would rather put any raw material volumes to use in-house to deliver higher production, than sell the material at stellar prices on the spot market for a quick return.

"We are more focused on creating product, and on ensuring a guarantee of supply to our customers," he said.

Feat_RHL_2  
RHI Magnesita’s Porsgrunn fused magnesia (FM) plant.
RHI was aiming to restart FM production at its partially-mothballed
facility in Norway in December, the company told IM. Whether
RHI’s Norwegian plant would start producing FM again has
been a main point of discussion among industry participants
over the past few months, as the shortage of the material
intensified in major consuming markets.
RHI Magnesita 

Integration and end markets

The first priority during the integration of RHI and Magnesita was communication with existing customers, so that clients knew who to go to if they had inquiries or wished to place orders.

An adjustment of the now-combined supply chain will be undertaken, which will last for as long as 12 months. This process will see the rationalization of capacities and logistics terminals, the closing of double or redundant operations, and shifting production where needed.

Two or three manufacturing sites will be closed as part of the process, Borgas confirmed to Industrial Minerals. These plants have been identified, but their locations have not been disclosed.

As separate companies, RHI and Magnesita had steelmaking as their leading end market, so the new company will be no different. Around 68% of the entire business will be focused on steel, while around 30-35% to other sectors, including cement, lime, aluminium, glass, copper and nickel.

Globally, the steel market has gone through a stark restructuring phase in the past few years, owing to overcapacity in China and widespread low prices.

Despite further cuts in capacity expected in the near future, especially in China, Borgas is adamant this will not affect the company’s steel-focused business.

"We think steel is an attractive market, and will remain so," he said. "[Despite the ups and downs in steel prices and capacity cuts,] our business is not really volatile because we depend on output."

Refractories supply to steel factories is determined more by steel output, rather than by capacity or prices. Output has been less volatile than prices and production is increasing. This is why the business stands on solid ground, he claimed.

"Let me tell you: we still see room for growth in steel," he said.